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Financial Freedom: The First Step is Personal Responsibility, Here’s Why
by Alexander Green, Chairman, Investment U; Investment Director, The Oxford Club
Monday, October 1, 2007: Issue # 716

I caught some flak from a recent column suggesting that, for free markets to work, the government shouldn’t be bailing out homeowners who borrowed too aggressively. (Although most of the complainers admitted they were overextended.)

Apparently, Barack Obama now feels their pain. In a Financial Times column, the Democratic presidential contender wrote that lenders were guilty of “pushing,” “hoodwinking” and “driving” low-income buyers into mortgages “they could not possibly afford.” He proposes a government fund to help millions of borrowers that he calls “victims.”

Hmmm. I don’t want to let lenders off the hook. Their rock-bottom lending standards are partly to blame for the real estate mess. And those lenders who committed fraud should certainly be prosecuted and punished. (Many, of course, have already seen their livelihood vanish and their share prices pummeled.)

But Senator Obama’s statement still puzzles me. As Washington Post columnist George Will wrote yesterday:

“How did lenders ‘push’ these people? Are these ‘victims’ absolved of personal responsibility simply because they were ‘told’ they could afford the mortgages? Could you define – and defend punishing – lending that is ‘irresponsible’ but not fraudulent? The foreclosure rate for so-called ‘jumbo’ mortgages – those of more than $400,000 – is approximately the same as the rate for subprime mortgages. Are borrowers who seek and receive such large mortgages also blameless ‘victims’ of being told and driven to do something reckless?”

And while we’re holding an inquisition, let me throw in a couple additional questions. Should borrowers who took on more than they could afford when the housing market was rising – and were able to bail out with six-figure profits – now be required to give those gains back? Or is risk-taking a one-way street, where you keep the gains when you win and the government picks up the tab when you lose?

Financial Freedom Means Being Accountable for Your Investment Decisions

Some people will accuse me of being hard-hearted. Go ahead. I’ve taken plenty of losses in my day. Any stock market investor worth his salt knows that’s just part of the game.

I certainly would have liked Uncle Sam to reimburse me for the losses I took. But, for the life of me, I can’t figure out how I could justify asking for it.

As George Bernard Shaw said, “Liberty means responsibility. That is why most men dread it.”

For more than three years I’ve been writing that the housing bubble was an accident waiting to happen. Sky-high home prices were not the result of soaring inflation, a large increase in population, big gains in discretionary income or any other fundamental factor. The foundation was simply low interest rates, EZ credit, and a firm conviction that real estate “always goes up.”

It doesn’t. According to Local Market Monitor, home prices in Los Angeles between 1990 and 1996 declined 21%. In Austin, TX, between 1986 and 1990 they declined 26%.

There are indications now that the national real estate market may be on its way to something similar. (Which, quite frankly, would only take home prices back to where they were a couple years ago.)

Is anyone to blame? Some fraudulent lenders, certainly.

But in a recent survey by Bankrate.com, homeowners with mortgages were asked whether they had a fixed-rate or adjustable loan. A whopping 34% said they had no clue.

Call me a grinch if you like, but if you walk away from a real estate closing with a loan that is several times the size of your annual income and you don’t know what type of loan you’ve just taken out, that’s not deception or duplicity That’s just dumb.

Good Investing,

Alex

Today’s Investment U Crib Sheet

The subprime mortgage fallout continued this morning. This time, Citigroup took the hit.

The company said it would take about $1.3 billion in losses on the value of securities backed by subprime loans.

UBS AG took a hit, too, saying it will post a $690 million loss in connection to bad loans.

Of course, in its unpredictable way, the market pushed both stocks higher in morning trading. (Hopes of another interest-rate cut by the Fed fueled the major indexes.)

To be sure, stocks have been subjected to unusually high uncertainly in recent weeks. But one market in particular has actually been a reliable source of short-term gains for months now – a market based purely on supply and demand. Here, securities are immune to the subprime mess, earnings reports, downgrades, balance sheets, etc.

See why it’s so profitable.

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Alexander Green is the Investment Director of The Oxford Club. A Wall Street veteran, he has over 20 years experience as a research analyst, investment advisor, financial writer and portfolio manager.Learn More...

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